3 Big Downgrades

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. Morningstar's fund research team downgrades their ratings on funds for a variety of different reasons. Sometimes, a significant manager or strategy change can lead us to re-evaluate a fund. Other times, costs are no longer competitive, and still other times, funds lose their competitive edge. Today, we're looking at three sizable funds that have recently been downgraded.

Greg Carlson: The Morningstar Analyst Rating of Fidelity Balanced was downgraded from Bronze to Neutral. That downgrade was driven by the downgraded fund's People rating from Above Average to Average. The downgrade there stems from our concerns about the team running the fund's equity portfolio that is divided into sector-specific sleeves. That team has seen a lot of turnover among the managers running those sleeves, and that detracts from our confidence in the fund's ability to add alpha versus its benchmark going forward. We do think the fixed-income team that runs part of this portfolio is strong, but it has typically run about a third of the fund's assets. The fund's neutral allocation is 60% stocks, 40% bonds. However, the fund has often been overweight equities versus that allocation, due to calls by the lead manager Bob Stansky.

Emory Zink: Vanguard GNMA is losing an experienced agency mortgage specialist in Mike Garrett, who is planning to retire in mid-2020. But there's still plenty of reasons to be optimistic about this strategy. First, his successor Brian Conroy, who joined this strategy in 2012 and was named a co-lead in mid-2019, follows a similar approach to Mike Garrett. He focuses on prepayment modeling and valuing cash flows as he allocates across the agency mortgage universe. The fees are low on this strategy, which is an advantage in a category where returns are incredibly concentrated.

Neal Kosciulek: The iShares Short Treasury Bond ETF SHV is an effective short-term cash alternative but doesn't provide for much else. The strategy tracks the ICE U.S. Short Treasury Bond Index, which includes Treasury securities that have less than one year remaining to maturity. As a result, the fund takes very little interest-rate risk and next to no credit risk. Other funds in Morningstar's ultrashort bond category tend to pitch in a little bit of credit risk to balance out the lack of interest-rate risk. As a result, the fund is not likely to produce an attractive risk-adjusted performance relative to its category peers over the long run. That is why we recently downgraded its Morningstar Analyst Rating from a Bronze to a Neutral.